Cloud providers' love/hate relationship with pay-as-you-go pricing

On-demand not the only option

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IT vendors had a golden age before the invention of the cloud.

It was essentially a risk-free delivery. Customers required a product, sales would propose a solution to which the customer would sign and commit, the customer would pay upfront, the vendor would start manufacturing (if required), and eventually the solution would be delivered to the customer.

At every step of this journey the vendor took steps to prevent its risk. The contract was negotiated per customer, thereby ensuring the deal was profitable. The customer paid upfront so the vendor didn't need to borrow money or risk the customer defaulting on a debt.

The contract commitment was made beforehand, so the customer took the risk that the solution might not be used. And finally, the customer was told when delivery would be made, so the vendor could optimize its stock levels.

On demand

Cloud computing changed this. Being able to buy computing resources on-demand, with no advanced notice, no commitment, no upfront payment, public pricing and immediate delivery, means the financial risk on the customers part is negligible. If you don't consume a resource, you don't pay for it; if you do, pay only for what you used at the end of the month. This is an attractive selling point for providers.

The result of this is that the risk is now put back in the hands of the cloud provider. The provider must borrow funds to invest in infrastructure that might not be used sufficiently to make a return.

The provider must build the technology in advance of when its customers need it - consumers can't wait for a resource, it must be delivered immediately. And the provider must take the risk that consumers won't pay its bills at the end of the month.

Taking risks

With this in mind, it's easy to see why none of the larger IT companies disrupted the market with cloud computing and it was left to Amazon.com, a company more commonly associated with books and films to do it first. IT companies had lots to lose by introducing pay-as-you-go; AWS on the other hand, had a lot to gain.

However, the tide is turning, and many cloud providers now offer alternative pricing schemes alongside on-demand, allowing consumers to take on more risk, thereby getting a discount.

In fact, the Cloud Pricing Codex found 50% of cloud providers now offer on-demand alternatives. So don't thank cloud providers too much for giving you that discount for a commitment – trust me, they wouldn't do it if it didn't ultimately benefit them too.

Dr Owen Rogers is Cloud Economist at 451 Research. He has previously held a number of product management positions and completed his PhD thesis on the economics of cloud computing in 2013